http://www.mossadams.com/publications/hardfacts/
May2005.pdf

Poor cash management is the Achilles heel of a business.
Indicators of poor cash management include:
• Large under billings
• High ratio of working capital to revenue
• Undocumented credit and collection policies
• No review of weekly or monthly accounts receivable agings
• Lack of follow-up on past due accounts
• Performing work for poor paying customers

Increasing the contract revenues in your company is easy compared to the complex cash management process that must go on within the company to deliver a project. Cash management encompasses the development of annual cash flow projections, down to individual project cash flow projections. These projections must be supported with sound internal accounting controls in order to implement and monitor.

Even an extremely successful company can put themselves out of business without good cash management processes in place. Cash management problems can negatively impact profit margins in a business from 1% to 15%.

The most common cash management problems are as follows:

• Inadequate working capital in the company
• Monthly billings not sent out timely
• Project cost invoices are not approved and submitted to home office on a timely basis
• No credit line established to cushion delays in collecting on billings
• Not taking advantage of purchase discounts (1 ½ % of annual purchases)
• Purchasing long term assets with short term debt
• Purchasing long term assets with cash
• Project manager and estimator bonuses based on billings, not collections
• Late payment of payroll taxes

How much cash do you need in your business? We advocate a common sense approach as there is no magic in the process. The first step is to convert your annual budget into monthly budgets and then convert the monthly budgets into monthly cash flows. For example, if you earn $1,000,000 in one month, does the cash flow into the business within that month? The answer is no! The earning process is followed by the billing process and then the collection process. How long does that process take in your business? Is it 30 days, 60 days, 90 days, more?

While you are waiting for your cash, whose money do you use? The obvious answer is the company’s money but does the company have enough money to finance future projects until cash collections come in? Your company will already have a lot of the answers to these questions if you take the time to analyze what your financial data is telling you. You can calculate number of days to collect accounts receivable, to pay accounts payable, and many other indicators from your annual financial statements. It is with this historical data along with well thought out 12-18 month projections that you can begin to develop your annual cash flow projections. If you find that you are collecting on your receivables in 90 days and you must pay your employees and vendors in 30 days, it is possible you will have to fund three months of operations before the collection process is complete.

In the above example, with a 15% gross profit margin that would mean costs of $1.7 - $2.5 million could be paid out of the company before the first months billing is collected, leaving a shortfall in month three of $1.5 million. As you can see, it is not only management that needs to understand and monitor the cash flow within their company. Company management must also educate their accounting staff, project managers and supervisors about the need for proper cash management